Inflation
- Expectations vs. reality
- Inflationary loop
- CPI out Wednesday
Narrator: Inflation expectations just hit their highest point since May of 2023. What does that mean for inflation?
So one of the data points that we got last week was the survey of consumers from the New York Federal Reserve. In it contains a question about inflation expectations, where people see inflation going a year ahead or multiple years ahead. If you look at just the year ahead series, this has risen now to its highest since May of 2023.
Animation: Chart shows the New York Federal Reserve 1-year inflation expectation data that has increased in recent years. Chart shows a large increase — up to nearly 6.8% in 2023 — that returned down to 3% in 2024. Chart also shows an uptick that started in 2025 continuing.
Narrator: This tracks pretty closely with the Consumer Price Index, or CPI for short. Really what the Fed is trying to prevent in any inflationary cycle, but especially this one, is expectations from becoming unanchored where consumers start to expect faster and larger price increases. And then that leads to this inflationary loop where something like the CPI continues to rise at a faster pace.
Animation: Chart compares expectation with actual CPI year over year increases for the same time period. Chart shows a new divergence between expectations and reality occurring in recent months.
Narrator: We're not at levels that are consistent with prior crises, especially the one that we saw four years ago. But if inflation expectations keep rising from here, that poses a challenge for the Fed in trying to get policy back to a restrictive area that will ultimately get inflation back to something that is consistent with 2%.
Animation: Chart shows the Core CPI month-over-month increase since 2020. Chart shows recent numbers hovering between 0.2 and 0.3%, down from a high of above 0.8% in 2021.
Narrator: That puts all focus on the CPI report that comes out this week for September, especially the core figure to see how much of the rise in energy prices is feeding through to the rest of the economy. And these days, it does make all the difference if you see a 0.2% month-over-month increase or if you see a 0.3% month-over-month increase. The former would certainly be consistent with inflation eventually drifting back towards the 2% target, while the latter would not and would warrant additional rate hikes from here.